Despite rising concern in some sectors about a second economic downturn taking hold this year, it is unlikely that a so-called “double-dip recession” would cause credit card charge-off rates to spike again, Moody’s Investors Service notes in a July 26 report.
Federal Reserve Board Chairman Ben Bernanke on July 21 told Congress the Fed expects slower progress on reducing joblessness and that “the economic outlook remains unusually uncertain.”
But if the economy sinks into a fresh recession and unemployment rates rise as high as 14% from about 10%, credit card charge-off rates for the first time in recent history would not rise along with unemployment rates but instead likely would level off at about 10%, about where they are now, Moody’s economists predict.
Credit card charge-off rates have been declining in recent months, after peaking at 11.12% during the first quarter of this year.
Moody’s contends that for the first time in decades, the long-observed correlation between unemployment and credit card charge-off rates is fraying because of core changes in credit card issuers’ underwriting policies and customer credit card use.
“We expect a movement away from the strong relationship that has existed between the unemployment rate and the credit card charge-off rate for the past 20 years,” Moody’s says, noting rising levels of unemployment and credit card charge-offs “generally tracked each other point for point in the 1991 and 2001 recessions.”
The pattern is changing because card-lending standards, which issuers began tightening in 2007, remain “extraordinarily tight” by historical standards, Moody’s says.
Also, card issuers over the past few years have “cleansed” their portfolios of shaky accounts. And as consumers have piled less of their household spending onto credit cards, it has reduced overall household-debt payments, resulting in less overall debt at risk.
“These factors would all mitigate future charge-offs,” the ratings agency says.
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